If you need to raise money for a business idea or project, then you are going to need to consider your options. If there is an audience ready and waiting for your idea, you might want to use these people as a form of funding. This form of funding is known as crowdfunding and although it might be considered free money, is it classed as a form of income? Will you need to pay tax on it? Will it be susceptible to VAT?
Will Tax Be Paid on All Income From My Crowdfunding Campaign?
Crowdfunding is about receiving donations from many people, which means that you might consider it to be free of tax but that is not always the case.
Although investigations into this by HMRC are thin on the ground, there is a risk that HMRC might consider these donations to be business income.
Despite this, should the money generated from crowdfunding meet the criteria of a donation, then it might not be susceptible to VAT. However, it will still be considered a business income. So, you will need to include this income within your sales. What this means is that you’ll need to pay personal tax or corporation tax on all increased profits. If this income is considered a business income then you’ll need to consider VAT too.
Will VAT Be Paid on My Crowdfunding Income?
If those who are making a donation have been offered a reward for their donations, then this is classed as an advance payment. So, if you are VAT registered, it could mean that this income might be susceptible to VAT. If you are not classed as VAT registered then this will be included within your VAT threshold, which is £85k.
Is VAT Applicable if it’s Considered a Donation?
If payments are going to be considered a donation then backers cannot receive any reward. Whether it’s a voucher for your item or service then this will be seen as applicable to VAT and so, it will be included in your VAT threshold.
Crowdfunding Income – When is it Considered as Income for VAT Reasons?
The rewards that you have been offering in exchange for the donation will determine the 12 month period that the income will be included within.
If you have been giving rewards in the form of services or goods then the date and time that the payment is made will be the time in which it is included as part of your VAT threshold.
If you give rewards in the form of vouchers, then this will depend on when the vouchers are used. If the voucher is an amount that is put towards a specific product then this is considered a prepayment and the date that it was purchased will be the date that it goes towards your VAT threshold.
Is Crowdfunding a Useful Tool For Raising Funds?
There are many things to consider when going down this route. However, it is important to remember that it is never worth doing anything that could cause damage to your business in an attempt to avoid paying tax.
So, if you think that the money you receive through your crowdfunding campaign will take you beyond the VAT thresholds or push you into a higher tax band, then it might be worth looking at other methods of raising funds such as loans as they are not classed as business income or VAT applicable.